Stronger limits sought on custodians of IRAs

  • Article by: DAN BROWNING , Star Tribune
  • Updated: January 25, 2012 - 8:49 PM

Pressure mounts for the state to license and bond unregulated administrators of self-directed IRAs.

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Gunvant Bhatt, left, Rep. Kate Knuth and Christian Sande at Sande’s law office. Bhatt, a retiree who lost money to Trevor Cook’s Ponzi scheme, won in court but can’t collect. Knuth plans to introduce legislation that can help.

Photo: Richard Tsong-Taatarii, Star Tribune

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Three years ago, Gunvant Bhatt set up a self-directed individual retirement account through an administrator in Minneapolis called Entrust Midwest.

At Bhatt's request, Entrust sent nearly $200,000 of his savings to Crown Forex SA, a Swiss firm that traded in currencies. But Swiss regulators were in the process of liquidating the company and returned the money to Entrust.

Instead of giving Bhatt the money back, though, Entrust redirected it to an account at Associated Bank in Wisconsin under the name of Crown Forex LLC, a bogus entity involved in the $194 million Ponzi scheme run by convicted fraudster Trevor Cook.

Bhatt, a retired mechanical contractor from Plymouth, says he didn't know about the transfer, and certainly wouldn't have approved it.

"If they had called us in June 2008 we would have known that they were not investing money because of the bankruptcy, and we would have found out about the Ponzi scheme or bankruptcy procedure, and we would not have invested the money," Bhatt said.

Now state Rep. Kate Knuth is trying to make sure that more Minnesota consumers don't end up like Bhatt and dozens of other investors who lost money in self-directed retirement accounts through no fault of their own.

Federal tax regulations allow people to invest their pretax retirement funds in certain kinds of investments if they pass the money through a self-directed IRA administrator or custodian. Some banks and brokerage firms offer this service, but the law allows unregulated businesses to do so as well.

Knuth, a DFLer from New Brighton, says she'll introduce a bill this session that would change that. She wants the Department of Commerce to license the unregulated IRA administrators and require them to have surety bonds and adequate insurance.

Bhatt's attorney, Christian Sande, says he approached Knuth, a childhood friend, to draft the legislation about the time he argued for summary judgment in a suit that Bhatt pursued against Entrust. He said it stunned him to learn that an IRA custodian could make such a big mistake and yet lack sufficient insurance to cover the damages.

"We were surprised that Entrust was so recalcitrant in responding to our lawsuit and defensive in responding to our lawsuit," Sande said. "Now we know that they really had nothing to lose, which is what happens when you have an unregulated company with practically no assets."

Bhatt recently won a court judgment to recoup his losses, $172,000 after taking into account some earlier distributions. However, it appears that Entrust had exhausted its insurance coverage after settling two similar suits with dozens of investors who as a group claimed millions in losses from the fraud scheme.

Court records show that Entrust administered about $160 million in assets, yet it had just $500,000 in "errors and omissions" insurance. The policy limit includes payments to the firm's defense attorneys, who had collected more than $200,000 by the end of 2010. Their final bill isn't known.

Entrust owner Todd Grill recently shut down the firm and opened a new company called Nexus Direct IRA, which operates the same type of business from the same office. Grill has not responded to requests for comment.

Jack Harper, a Minneapolis attorney who settled a lawsuit with Entrust on behalf of 53 clients, said regulation of firms like Entrust is long overdue. "It's absolutely a shame that the issue wasn't taken up previously," he said.

Cathy Jackson Lerman, an attorney in Coral Gables, Fla., is pushing for a federal law to address the issue. She represents a number of clients who were burned in large Ponzi schemes.

"I think that Congress, legislators and regulators have enabled a large group of very unscrupulous businessmen to develop what I'll call a cottage industry to facilitate Ponzi schemes ... and it has absolutely no oversight or accountability at any level," she said.

The New York Times published a story in 2009 noting that several massive, unrelated Ponzi schemes -- including Bernard Madoff's -- had wiped out more than $1 billion from self-directed IRA accounts administered by another administrator. Like Entrust Midwest, it denied responsibility for the losses.

Lerman said investors have no idea that they have so little protection when investing their money through some "mom and pop" administrators of self-directed IRAs.

Eric Johnson, a St. Paul tax attorney, questioned whether federal tax law would pre-empt Knuth's efforts to regulate self-directed IRA custodians at the state level.

House researchers have raised that issue as well, Knuth said.

"I think it would be great if the federal government would be willing to go into this issue," she said. "But I'm not willing to wait. I'll work with our research staff to figure out how to make sure that Minnesotans are protected."

Dan Browning • 612-673-4493

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